Shares get uplift from dovish Fed comments

Was Post Fed Chair Speech Rally a Market Overreaction

Was Post Fed Chair Speech Rally a Market Overreaction

According Reuters, nearly all Federal Reserve officials at their last meeting agreed another interest rate increase was "likely to be warranted fairly soon", but also opened debate on when to pause further hikes and how to relay those plans to the public.

Traditionally, stock markets love lower interest rates.

In an interview this week with The Washington Post, Trump said he was not happy with Powell's support for further rate hikes.

But policymakers may be divided over what to do after that, with some anxious that raising rates after December could "unduly slow" the American economy, just as signs of vulnerability are beginning to gather, the minutes showed.

He said then that growth overseas was likely to weaken and that U.S. fiscal stimulus, which had goosed consumption, would soon fade.

"Almost all participants expressed the view that another increase in the target range for the federal funds rate was likely to be warranted fairly soon" if employment and inflation remain in-line or stronger than the Fed's current expectations, the minutes said.

Analysts at Westpac explain that the United States equity markets like the fact that the Fed Chairman Powell appears open to a slower pace of monetary tightening. It was 2.95 percent earlier this month, suggesting investors have scratched off a full rate hike from their forecasts of Fed policy. "Bloomberg Economics does not take it as a signal of the Fed dialing back on the number of expected rate hikes, but rather as an intent to be more flexible in setting policy as they approach the neutral rate".

It was a "rookie mistake, " Omair Sharif, senior US economist at Societe Generale, said Wednesday in a note to clients. In language following that policy meeting, officials may convey "sufficient softening of future expectations", said Sprott's Reik, who's expecting the central bank to halt rate hikes next year.

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But markets, especially after the recent selloff, were focused less on such subtleties than on what Powell may have telegraphed about the future path of rate hikes.

And Powell's words stood in stark contrast to his remarks of a month earlier, when he said rates were still "a long way" from neutral, perhaps suggesting the Fed actually had a lot more tightening to do.

Minutes released yesterday from the Fed's last policy meeting also showed some policymakers believed going above neutral could slow the economy needlessly.

Stock markets began a broad descent toward a correction - a decline from the most recent peak of at least 10 percent - in early October, just after Powell had sounded a quite confident tone on the economy. And Powell's own communications plans to end each meeting with a news conference starting next year mean he needs a clear message for each meeting, starting next month. "As you get closer you tack a little bit more".

After the financial crisis erupted in 2008, the Fed kept rates at historically low levels to revive the ailing economy.

In November, Fed policymakers agreed to hold rates steady, leaving the benchmark rate unchanged in a range of 2% and 2.5%.

October's Wall Street sell-off and a rise in bond yields tightened financial conditions while some sectors most sensitive to interest rates, such as the housing sector, had already begun to slow. Currently, the fed funds futures are pricing in an 83 percent chance of a December hike and one more in 2019.

"There is a great deal to like about this outlook", he added.

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